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Posted on 9 March 2013 | 3,654 views

After Hours Basket Bust Sends Stocks Soaring Then Plunging on Anniversary of the Flash Crash

A trading glitch during the after-hours trading on Monday May 2, 2011 sent dozens of “Bad Trades” on some Healthcare Sector stocks flying. In a matter of minutes, shares of Beckton Dickinson (Stock Symbol: BDX) , Boston Scientific (Stock Symbol: BSX) and McKesson (Stock Symbol: MCK) soared 30% in value.

This was something troubling — a disturbance about which investors should be deeply concerned and then these stocks tumbled back to earth, as if nothing had happened.

In response, Nasdaq OMX Group canceled all trades made in 26 companies between 4:57 p.m. and 5:05 p.m. ET on Monday. Direct Edge shot down trades in 52 companies for the same five-minute span. Both exchanges said they canceled all trades executed at or above 30% from the “consolidated prior print” of the affected stocks.

Technically, the situation is known as a “Basket Bust” — a scenario involving price movements of greater than 30% on a basket of 20-plus securities and it was adopted as a market safeguard last year in the wake of the “Flash Crash“, yet while exchange officials scrambled to pass off this little price shock as if it were nothing, in truth the glitch should make investors as nervous as ever in dealing with the stock market these days.

Ironically, this basket bust mess occurred just short of the one-year anniversary of the Flash Crash. On May 6, 2010 last year, the Dow Jones Industrial Average lost 1,000 points, then recaptured 650 points of that before the close. In one stretch, lasting about 15 minutes, the Dow was off about 500 points, and then got it all back. Events like the “After-Hours Glitch” or the flash crash wind up pointing out the dangers of trading rather than buying for the long haul.

But that doesn’t mean the potential for widespread trouble is any less. The after-hours trading gaffe on Monday wasn’t even remotely close to the flash crash in importance, but had the same problem come up during regular trading hours, it would have been a nightmare. Had CNBC and Fox Business been reporting on those stocks popping 30% during normal business hours — and then having the trades and the action all called off — the number of market observers calling “shenanigans” on the market would have been enormous.

Perhaps the complacency over Monday’s events lies in the fact that the market has been on a roll lately. Had this happened while the market was in the dumps, investors would have freaked out.

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